23 Mar 2015 07:00
INVISTA EUROPEAN REAL ESTATE TRUST SICAF ("IERET" or the "Company")
ANNOUNCEMENT OF UNAUDITED NAV AND UPDATE ON SALE OF HEUSENSTAMM ASSET
FOR THE QUARTER ENDED 31 December 2014
23 March 2015
Net Asset Value
As at 31 December 2014, the Company's unaudited Net Asset Value calculated using International Financial Reporting Standards and adjusted to add back deferred tax was €0.137 (10.6p) per share, reflecting a decrease of €0.017 or 11.04% over the quarter and 1.06p or 11.67% in Sterling. The unaudited Net Asset Value, calculated under International Financial Reporting Standards, was €0.133 per share.
A breakdown of the unaudited Net Asset Value is set out below:
In € million | As at31 December 14 (€m) | As at30 September 14 (€m) | 3 month change (€m) | 3 month change (%) |
Property portfolio | ||||
Like for like direct property | 234.4 | 237.7 | -3.2 | -1.35% |
Valuation of assets held for sale or sold | 47.3 | 44.1 | 3.2 | 7.26% |
Independent valuation | 281.8 | 281.8 | 0.0 | 0.01% |
Net current assets1 | 47.3 | 47.8 | -0.5 | -1.05% |
Market value of interest options | 0.1 | 0.0 | 0.1 | |
Senior debt | -211.1 | -210.4 | -0.7 | 0.33% |
Preference shares | -35.2 | -34.9 | -0.3 | 0.86% |
Net deferred tax liabilities3 | -1.0 | -0.8 | -0.2 | 25.00% |
Net Asset Value | 34.6 | 39.4 | -4.8 | -12.18% |
Adjusted Net Asset Value1 | 35.6 | 40.1 | -4.5 | -11.22% |
Adjusted Net Asset Value1 per ordinary share € | 0.137 | 0.154 | -0.017 | -11.04% |
Adjusted Net Asset Value per ordinary share fully diluted (€) 1,2 | 0.137 | 0.154 | -0.017 | -11.04% |
Net Asset Value per preferenceshare (€)3 | 1.41 | 1.37 | 0.035 | 2.55% |
Number of ordinary shares | 259,980,909 | 259,980,909 | 0 | 0.00% |
1 Net Asset Value adjusted to add back deferred tax (both current and non-current liabilities).
2 The NAV for preference shares is equal to the nominal value plus accrued interest divided by the total number of preference shares.
3 As at 31 December 2014, deferred tax liabilities of €17.0 million, based upon temporary differences at the time of initial recognition arising from transactions treated as asset acquisitions have not been recognised in accordance with IAS 12. The Group has deferred tax assets of €16.4 million which also have not been recognised.
The unaudited Net Asset Value incorporates a number of events and key factors during the quarter including:
· Overall, the property valuation increased by 0.01% to €281.8 million. Following a reclassification of properties to assets held for sale as at 31 December 2014, the valuation of assets held for sale increased by €3.2m or €0.01 per share over the quarter, whereas like-for like direct property has decreased correspondingly by €3.2 million or €0.01 per share.
· An increase of the senior debt amount of €0.7 million is due to the amortisation of debt issue costs.
· The principal cause of the reduction in NAV during the quarter was capital expenditure spent over the period, reducing the cash balances held by the Company.
The Company's unaudited Net Asset Value figure incorporates the independent property portfolio valuation as at 31 December 2014. The property portfolio will next be valued on 31 March 2015.
Figures converted into sterling assume a EUR per GBP exchange rate of 1.2878 as at 31 December 2014.
Key management events over the quarter and post quarter end
· Portfolio valuation increased by 0.01% over the quarter (on a like for like basis) to €281.8 million, representing the first overall quarterly portfolio valuation increase for the last 3.25 years.
· Post quarter end sold two assets in Belgium at a sale price of €5.25 million.
· Post quarter end entered into contracts to sell the Heusenstamm asset in Germany for a net price of €33.4 million, and the Girona asset in Spain for the net price of €3 million.
· Vacancy rate increased to 19.42% as at quarter end, following the termination of a number of leases. Following new lettings completed post quarter end the overall void rate was reduced to 14.82% on a like for like basis. Including the effect of completed and contracted sales, the vacancy rate post quarter end stands at 17.93%.
Property Portfolio
As at 31 December 2014, the Company's property portfolio was valued at €281.8 million and comprised 30 assets located in five countries. The portfolio value increased over the quarter on a like-for-like basis by 0.01%.
As at 31 December 2014, the Company's portfolio generated gross income of €24.1 million per annum, representing a gross income yield of 8.55% and a net income yield of 7.47%. The portfolio weighted average lease term to break is 3.9 years and 5.5 years to expiry. The portfolio void level by income as at 31 December 2014 increased over the quarter to 19.42% as a result of leases terminated at the end of the year. After the end of the quarter new leases were secured to take up vacant space and bring the void rate down to 14.82% on a like for like basis.
The portfolio's credit rating as measured by the Investment Property Databank's M-IRIS credit analysis system in January 2015 was 74 out of 100, which is classified in the "low-medium risk" band.
As at 31 December 2014 the portfolio composition was as follows:
Sector Weightings
Sector | %* |
Office | 33.2% |
Logistics | 46.9% |
Retail | 19.9% |
Total | 100.0% |
*Percentage of aggregate asset value as at 31 December 2014
Country Weightings
Country | %* |
France | 54.0% |
Germany | 37.1% |
Spain | 1.2% |
Netherlands | 5.4% |
Belgium | 2.3% |
Total | 100.0% |
*Percentage of aggregate asset value as at 31 December 2014
Top 10 Properties
Property Location | Sector | %* |
Heusenstamm, Frankfurt, Germany | Office | 14.5% |
Riesa, Germany | Retail | 12.5% |
Cergy, Paris, France | Office | 10.5% |
Grenoble, France | Office | 5.9% |
Monteux, France | Logistics | 5.6% |
Miramas, France | Logistics | 5.4% |
Marseille, France | Logistics | 5.1% |
Pocking, Germany | Retail | 4.4% |
Tiel, Netherlands | Logistics | 4.4% |
Montauban, France | Logistics | 4.0% |
Total | 72.3% |
*Percentage of aggregate asset value as at 31 December 2014
Top 10 Tenants
Tenant Name | %* |
Deutsche Telekom | 25.1%1 |
Valeo | 9.6% |
Norbert Dentressangle | 8.6% |
Carrefour | 5.7% |
SDV Logistique | 4.3% |
Real SB-Warenhaus | 4.2% |
Euromaster | 3.6% |
Strauss | 3.2% |
OBI GmbH | 2.5% |
ATAC SAS | 2.1% |
Total | 68.9% |
* Percentage of aggregate gross rent as at 31 December 2014
1 Given the current investment strategy, the UK Listing Rule restriction on limiting rental income from any one tenant to less than 20% is superseded. The contracted sale of Heusenstamm would remove Deutsche Telecom as a tenant.
Market Context
With the Eurozone continuing to experience low growth and deflationary fears, the ECB adopted a US form of quantitative easing (QE) where the bank will buy €60bn of assets each month until at least September 2016 injecting close to €1trn into the economy. This action combined with low oil prices could provide a significant boost to the economy through a reallocation of resources to stimulate demand in economies that are net importers of energy, a reduction in long term interest rates and downwards pressure on the Euro that will improve the competiveness of the export sector. However, given the higher structural cost of energy in Europe, prevailing low interest rate environment and geopolitical risks present in the ongoing negotiations of the extension to the current Greek bailout programme, QE is unlikely to be a panacea for downside risks to the economic outlook.
French logistics occupier activity reflected the comparatively weak performance of the French economy with annual take-up volumes totalling 2.4m sqm in 2014, representing a decline of 8% y/y (BNP Paribas). Demand remains focused on the high quality assets located near to major cities along the North-South axis with the Greater Paris region the most active market in France accounting for 35% of national transaction volumes. The Greater Paris region and Lyon were amongst the few markets to experience an increase in occupier demand in 2014 with regional markets experiencing a disappointing year with annual volumes down 22% y/y (BNP Paribas). Availability increased by 11% since January with an estimated 3.9m sqm of space currently available (BNP Paribas). The majority of space released has been of Grades B and C specification with Grade A stock experiencing a stability in levels of availability with some markets experiencing an acute shortage of supply. The lack of speculative schemes has created an increase in activity for built-to-suit transactions that accounted for 42% of take-up.
German office occupiers entered 2015 with higher levels of confidence, with sentiment indicators published by the IFO Institute and ZEW improving markedly in recent months, which should support demand for office space in early 2015. Activity in the occupier market experienced strong growth in Q4 with approximately 1m sqm of transactions completed, providing a boost to the annual total that reached 3m sqm, up 3% on 2013. Berlin (+36%), Munich (+3%), Hamburg (+19%) and Stuttgart (+8%) all experienced annual growth in occupier demand whereas Düsseldorf (-22%), Cologne (-13%) and Frankfurt (-14%) experienced a decline (Savills). Vacancy rates have been on a downward trend since Q4 2010 and are now at 7.6% on an aggregate level for the largest office markets. In the secondary office market, demand has improved for good B locations with some agents reporting that rental values have started to increase for the assets of higher specification.
The outlook for German domestic demand remains strong with low unemployment, high consumer confidence and real wage growth supporting consumer spending. These factors should continue to encourage both national and international retailers to target the German market for expansion. Retail schemes/areas benefitting from a strong tenant mix and diversity in retail offering continue to outperform the wider market. The structural consolidation driven by online sales remains a key driver in occupier activity with evidence that this trend has improved the productivity of physical stores with retail sales per sqm now back to the level of 2006 (CBRE).
CBRE reported that a total of €77.7bn was invested in European commercial real estate in Q4 2014, the highest quarterly total since Q4 2006 bringing the annual total to €218bn, an increase of 32% y/y. Quarterly investment in the 'recovery' markets remained strong with Spain (€3.4bn), The Netherlands (€3.9bn) and Ireland (€1.6bn) all recording quarterly growth of between 50-100%. The increase in activity has been largely driven by the return of international capital to these markets in search of higher yields. Interestingly, ULI Emerging Trends reported that approximately 66% of respondents believe that core real estate is overpriced in nearly all markets as equity rich sovereign wealth funds and the entrance of new sources of capital such as Asian pension and insurance capital into the market has pushed prices up in the top European cities. However, QE is likely to support current capital values given the downward pressure it will place on government bond yields and the consequential widening in the yield spread to real estate. However, the higher prices and lack of available core product has pushed some investors into seeking higher risk markets/assets particularly in the UK, Germany and Nordics where macro-economic conditions are more conducive to implementing these types of strategies.
Asset Management Results
As described in the Company's Annual Report and Accounts 2014, the current mezzanine facility has a flexible structure that will enable the Company to pursue its non-core disposal plan by providing €85 million of freely prepayable proceeds which can be repaid via sales from an agreed portfolio of assets or from contributions of additional equity. Once the total amount of the loan has been reduced to €135 million and so long as the LTV is below 70%, the ("Step-Down Event"), the margin will be reduced to 470bp over three month EURIBOR. The Company is committed to reaching the Step-Down Event, with 12 assets remaining to be sold from the disposal portfolio as at 31 December 2014.
Post quarter end Invista European Real Estate Trust completed the sale of two office properties located in Belgium. The sale was achieved at a total price of €5.25 million. After transaction costs, the remaining sale proceeds were used to repay a portion of the Company's outstanding mezzanine debt. The two properties represented 100% of the Company's investments in Belgium, so this disposal also contributed to the further consolidation of the Company's remaining portfolio of investment properties located mainly in France and Germany, and, following the liquidation of the relevant Belgian holding entities, this sale will also result in a reduction of corporate costs.
In addition, the Company has entered into a contract to sell the largest asset within its property portfolio, Campus Heusenstamm, for an expected net purchase price of €33.4 million, €31 million of which will be received on closing of the transaction, the remainder being held in escrow with the likelihood of being released by Q3 15. This transaction represents a discount of 18% to the latest Savills net valuation (€40.9 million). The sale of this asset, after long and widespread marketing, will represent a significant step towards reaching the Step-Down Event, since it will enable the Company to apply the full net proceeds in deleveraging the mezzanine facility, which the Board concluded justified the sale, notwithstanding the discount to the most recent Savills valuation.
The Company has also signed an agreement to sell its remaining Spanish asset, located in Girona, for a net price of €3 million, representing a discount to valuation of 10%. The contract has a long stop date of 30 June 2015, after which, if the transaction has not completed, the purchaser will lease the full space of the asset. Since this property is 100% vacant at present, this sale represents a reduction in operating costs and overall portfolio vacancy, as well as enabling the Company to reduce its corporate costs by exiting the Spanish market and further consolidating its core property portfolio.
Borrowings
As at 31 December 2014, the Company had drawn down a total of €217.9 million of debt in respect of its facilities with Bank of America Merrill Lynch and Blackstone Real Estate Debt Strategies. The Company's Loan To Value ("LTV") ratio as at 31 December 2014 was 77.33% based on the latest Savills valuation of the property portfolio (as at 31 December 2014).
Outlook
In order to deleverage IERET's portfolio, last year the Company identified 14 assets as being ready for sale. Since that time, the Company has disposed of two assets in the period up to 21 December 2014, and another two Belgian assets post quarter end. The contracted sale of the Heusenstamm asset represents the disposal of a significant income generating property which has been undertaken on the path to consolidating the Company's focus around its core portfolio. The consequent loss of income therefore creates transitional pressures on interest coverage and other covenants in the Company's mezzanine debt facility. Nevertheless the disposal programme and the overall business plan were agreed at the outset with the Company's new lenders and they are supportive of the steps being taken to implement them. It remains, however, a complex and uncertain process to achieve the desired result of a deleveraged core portfolio of German and French properties.
In the light of this, the Company announced in its statement of results for the year ended 30 September 2014 that it has recently appointed the leading real estate investment bank Eastdil Secured LLC ("Eastdil"), part of Wells Fargo & Company, to undertake a strategic review and advise it on a range of options, including the sale of subsidiary undertakings owning the core portfolio.
For further information, please contact:
Internos Global Investors
Ludovic Bernard +44 20 7355 8800
Citco REIF Services (Luxembourg) SA
Jorrit Crompvoets +352 47 23 23 212